Ellen Trester - Financial Reporting & Regulatory Compliance Manager Dan Florness - President and Chief Executive Officer Holden Lewis - Chief Financial Officer

Robert Barry - Susquehanna Andrew Buscaglia - Credit Suisse Hamzah Mazari - Macquarie Ryan Merkel - William Blair Robert McCarthy - Stifel

Good day, ladies and gentlemen and welcome to the Fastenal's Fourth Quarter Conference Call. I would now like to introduce your host for today’s conference call, Ms. Ellen Trester. You may begin.

Welcome to the Fastenal Company 2016 annual and fourth quarter earnings conference call. This call will be hosted by Dan Florness, our President and Chief Executive Officer and Holden Lewis, our Chief Financial Officer. The call will last for up to 45 minutes and we will start with a general overview of our quarterly results and operations, with the remainder of the time being open for questions and answers. Today’s conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today’s call is permitted without Fastenal’s consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage, investor.fastenal.com. A replay of the webcast will be available on the website until March 1, 2017 at midnight Central Time. As a reminder, today’s conference call may include statements regarding the company’s future plans and prospects. These statements are based on our current expectations and we undertake no duty to update them. It is important to note that the company’s actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company’s latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Dan Florness.

Good morning, everybody and thank you for joining our call today. And I'll start by just Apologizing for the state of my voice on today's call. I am recovering from a bit of a cold, so I'll try to speak clearly. My comments this morning will be relatively brief. I just want to touch on five points. First off we had an upbeat finish to a tough year. Secondly, I believe we've changed the trends of our business. Third, I believe we've improved the health of our business. The fourth and fifth aren’t comments so much on 2016, but I think they are comments that we should always remind ourselves of, one is we have great people close to the customer and we have great people behind the scenes to support our local business. Both are structurally important components to the success of our business today historically and I believe going forward. In regards to the upbeat finish our sales trends and our gross profit stabilized and/or improved depending on if you look at that in comparison to Q3 or comparison to Q4 of a year ago and we grew our earnings. For a new CEO you can appreciate the importance that comes with having a release that doesn’t have some either parenthesis or dashes in front of a number or two after we've come through quite frankly a pretty tough 2015 and 2016 period. Secondly, our trends have improved in both, in the last several years, primarily 2014 and 2015 we had significantly added people cost to our organization as we grew our headcount primarily at the store, but throughout the organization. These costs, when I look at the trends that come with it had about peaked in the second quarter of 2016 and as we have gone through the year those costs helped cycle down a bit and I believe we are poised quite well to manage that expense as we go into the new year. We also have added occupancy costs quite dramatically in the last several years. A piece of it relates to our vending platform, a piece of it relates to the automation we put into our distribution centers and a piece of it relates to our store network. There is always some built in inflation in the store network and our job everyday is to manage that well, but whether it might be property taxes or some other or some CAM charges or some inflation in the lease we have to be very mindful of how we manage that in the long term, especially as the business is evolving. And again, similar to the people cost, I believe we exit the year in a much better spot, but we still have some work ahead of us on the occupancy side of the equation, because we want to plan for and allow for growth there that comes from continued expansion of our vending platform. In regards to the business health, we upgraded around 2100 stores to our CSP 16 format and while we haven’t talked about a lot on our calls, that's a tremendous undertaking when you look at our store based business and this 2100 upgrade was primarily in our U.S. based business. We have some upgrades for our Canadian business as we enter 2017. We also upgraded – excuse me, upgraded or optimized if you will, over 50,000 vending machines and that's more about improving our cost to serve than that is about our revenue enhance. So there is some revenue improvements because of it. So we had rapidly rolled out those 50,000 plus machines over the last five years. And in 2016 we took the opportunity to go and visit each and every machine and to challenge how we could be more efficient with that machine and I believe that improves the health of that vending business and improves our ability to serve and grow the business in the future. We also changed our mindset over the last several years as it relates to onsite. We've been – our first onsite occurred in 1992 and at the end of 2014 we had around 200 onsites that we've slowly grown in our business. If I think of 2014 just under 5% of our district leaders and we have today roughly 255 district managers across the company. Just under 5% of them signed in onsite, we signed, I don’t know the exact number it was around 14 onsites that year. In 2015 we took a big step forward and around 25% of our district leaders signed in onsites that year and we signed around 80 onsites. In 2016 Fastenal has a hallmark of finding great people, challenging them to be successful but not micromanaging. In 2016 over 50%, I believe 54 is the exact number, but over 50% of our district leaders had an onsite signed in their business and that translated into 176 signings during the year. Our goal going into 2017 is quite simple. The key to moving that participation up and for 80% of our district managers, our district leaders to have an onsite signed in their districts. If we are able to accomplish that we believe we could sign somewhere between 275 and 300 onsites. We believe that's an achievable number from a signing perspective. It is an absorbable number from an execution standpoint because very much of the work is spread across 255 business units, 2600 stores, not concentrated in one small support group, so we're very excited about that. And we also believe with the CSP 16 in place the team that helped roll that out is there to also help with the implementation of our onsite, so we believe we're – we have improved our capacity to implement. Finally we talked about, oh, excuse me, fourth, we talked about great people closer to the customer. 75% of our employees know our customers on a first name basis and yet we have a very efficient cost structure. I don’t believe any other nationwide distributor can lay claim to that and we're proud of that fact. Finally, the team behind the scenes, our team is strong. We are wired for change and will [indiscernible] all of these things help us serve our customer well. I'll close with one thought, we believe in our people, we challenge each other to improve and we challenge each other to grow each day. With that, I'm going to turn it over to Holden, but before Holden starts in I just want to, so this is Holden's second earnings call. Many of you know Holden Lewis from his previous career as a sell side analyst. He has covered us for quite a few years. We knew Holden well. We're not quick to bring in somebody from the outside into our organization in this senior of a role, but we've really liked Holden's ability we felt to culturally fit with us and the fact that he could bring a new set of eyes, a new [critique] [ph] and a tremendous skill set to our organization. So with that, I'll turn it over to Holden.

All right thank you Dan and good morning and thanks for joining the Fastenal's fourth quarter call. I'm going to begin with a quick recap of our full year 2016 results and then I'll move on to a discussion of the quarterly performance. So, in 2016 Fastenal generated $3.96 billion in sales, that's up 2.4% from 2015. We did have an extra day in the year, so on a day's basis we were up about 2%. I'm not going to belabor the tough conditions that persisted through the year and I feel like that's well understood by you, but I would like to highlight some of the drivers that allowed us to grow despite it. First, on vending, we finished 2016 with 62,822 machines, that's about up 7300 units or 13% over 2015. So at this point 46.1% of our sales now go to customers that use vending. So it is a fairly well represented in the field. Revenues to our machines increased by more than 10% in the fourth quarter. Signings of 18,059 machines were up 1% year-over-year. Note that these figures exclude the nearly 15,000 units that we installed related to our leased locker program. Despite all those successes, vending did not quite reach the goals we'd set for it in 2016, but note that signings were a three year high and we think that with the distractions related to our optimization efforts and the leased locker initiative now past us, we're targeting more than 20,000 signings in 2017. Secondly on our onsites we signed 176 new agreements in 2016 a little shy of our goal of 200, but substantially above the 80 that we signed last year and this frankly contributed to driving sales through these sites up at a better than 25% rate for the year. We're gaining momentum here and we are targeting 275 to 300 signings in 2017. With respect to national accounts, we signed 190 new agreements that's up 14% from 2015. Even with softness among our largest 100 customers these signings contributed to our total national accounts revenues being up by a bit more than 4% on the year, we still see significant opportunity with new and existing customers and even with national accounts now being about 47% of our total sales. Lastly, the SKUs related to our CSP 16 initiative, they also grew at a little bit better than a 4% rate in 2016 and so we feel good overall about the strides that we're making in our growth drivers, we remain convinced of their effectiveness in driving share gains and we look forward to further progress in 2017. Margins in 2016 were a challenge. Our gross margins finished the year at 49.6% that's down 80 basis points which is primarily from mix and pressure on product margins, the latter being particularly early in the year. Our operating margins finished 2016 at 20.1 and that was down about 130 basis points. In addition to the gross margin decline, occupancy was up as we continued to invest in our vending initiative. We are likely to remain challenged by mix and vending related occupancy, but some of the product pressures that we experienced in the first half of this year have eased at this point. We've been tighter with cost in the second half of 2016 and some of the minor expenses for things like store closures or CSP 16 rollout hopefully don’t recur. So as a result we think we're better equipped to defend our margin in a slow growth environment. We'll even expand it if growth accelerates from here than with the case in 2016. Our interest expense on the year roughly doubled while our average share count was down 1%. Both those fact reflect our share buyback activity over the last eight quarters. Our tax rate was down from 37.5% to 36.8% in the year which really just was some jurisdictional shifts as well as the resolution of certain state tax matters. It all blended into a 2016 EPS figure of $1.73 which was down about 2.3% for the year. Now moving on to the fourth quarter results. Total and daily sales in the fourth quarter were up 2.7%, that's a modest acceleration from the prior nine months. We can't ignore the easier comparison relative to last year's fourth quarter when our daily sales rates was actually down 2%. Still the December daily sales were up 3.2% and that was likely understated because of holiday timing. So in contrast to a poor November, frankly we consider December to have been as expected. Now the details of the quarter remained a bit of a mixed bag. Growth from our top 100 accounts remained flattish on weakness among general industrial companies. The proportion of stores and national accounts that were growing in the fourth quarter was largely unchanged from the third quarter and construction fasteners actually weakened in the period. So in the end, growth of 1.6% in North America really wasn’t much changed from the prior period. On the other hand it is notable that heavy manufacturing was up 2.3% in the fourth quarter. That's the first time that's been up since the second quarter 2015. Similarly OEM fasteners were weak but the down 2.8% was also the narrowest decline we've seen since the second quarter of 2015. Further, I would note that there is a more favorable tone surrounding process industries as we enter 2017. We are going to continue to assume the sluggish business conditions that have prevailed through 2016 are going to continue into 2017, but there does remain and there remains a great deal of uncertainty on a number of fronts, but that said, the environment has become more optimistic. Our gross margin was 49.8% in the fourth quarter, that's down 10 basis points versus the prior year, but it is up 50 basis points against the third quarter. With respect to the year-over-year change, mix continues to weigh as the fasteners fell 180 basis points to now represent 35.6% of our sales. Given this we view the stability in the period favorably. There was no single meaningful offset, rather there was small improvements in areas like purchase discounts and freight that benefited the quarter relative to the prior year. As it relates to the fourth quarter, we were pleased to see the marginal rebound from the third quarter 2016. Similar to the annual results this is less than a single item than it is from the accumulation of many small but favorable improvements including better margins on non fasteners or higher mix of exclusive brands building revenue associated with our lease locker program, better purchasing on the other variables like that. A lot of these things worked in our favor at the gross margin in the fourth quarter, but there is nothing in this improvement that strikes us as one time or temporary in nature and at this point we would characterize the margin environment as stable. Our operating margin was 19.3% in the fourth quarter also down 10 basis points on a year-over-year basis. SG&A as a percentage of sales was unchanged at 30.6% of revenues. Payroll which is 65% to 70% of our SG&A was down 30 basis points as a percentage of sales persistently sluggish demands had two effects here. First, they continued to temper the incentive pay in the fourth quarter. Second, we spent much of 2016 letting attrition unwind the raise staffing we experienced in 2015. We finished 2016 with headcount being down 5.4% were down 4.1% on an FTE basis. These variables more than offset the effect of higher health insurance costs. Occupancy which is 15% to 20% of total SG&A was up 30 basis points as a percentage of sales. Vending was the primary catalyst behind this. We don’t expect that dynamics to change in 2017. We did expect efforts to rationalize our store base in the second half of 2016 will provide a larger benefit and wound up being the case and that’s going to be a point of emphasis to our company in 2017. In 2016 we trimmed staffing in stores, we invested in growth drivers and technology and used our balance sheet to invest strategically in inventory. We like where our cost structure shift is as we exit the fourth quarter. We're going to continue to invest in our growth drivers, but given the investments and rationalizations already made we believe that with the lower fastener growth we can leverage the income statement 2017. Finally, we generated $133 million in operating cash in the fourth quarter that's down 8.5% versus last year. It also represents 116% of the quarter's net income which is below last year. This decline year-over-year reflects three things. First, in the fourth quarter 2016 we took advantage of favorable year end buys. Second, variables were much higher in the fourth quarter of 2015 related to adding CSP 16 inventory in that period and then third, our receivables fell at a faster rate in the fourth quarter of 2015 due to the relatively sharper pull back in demand in that period. These factors all served to inflate the cash flow in the fourth quarter of 2015 relative to fourth quarter 2016. That said, we generated free cash flow after dividends of $18.5 million. Our capital expenditures are down 23% year-over-year and down 63% sequentially as we wind up the rollout of our lease locker program. As a result we've reduced our net debt by roughly $21 million and retained flexible, leverage of net debt being 12.5% of total capital. We expect cash generation to be improved and free cash flow after dividends to be positive in 2017. We don't anticipate a CSP program of the sort that we had in 16 and we expect capital spending to come in around $120 million. With that, I will turn it over to Kevin to take your questions.

[Operator Instructions] Our first question comes from Robert Barry with Susquehanna.

Hey guys, good morning.

Hey Rob, good morning.

So I guess the broader question is just to provide a little bit more color about what you're seeing in some of the key end markets in particular heavy and light manufacturing in oil and gas, but also more specifically, I noticed you updated the monthly sequentials and I think if you plug those into the model it implies 1Q growth would be just over 5%. I know that's not meant as an outlook, but is that how you're thinking that growth could track in 1Q?

Sure. So, to address your second question first. We all know how the math works. Yes, we've updated the sequentials. As we go into 2017 we're going to begin discussing those sequential rates of change in terms of the prior five year averages as opposed to what we've done historically with 98 going from 1998 forward. So the numbers are what the numbers are. I'll let you plug them in and kind of figure out where it is, but I think that you're on the right track in terms of how that should fall out given those sequential rates to change. On the second question, where we saw the most encouraging signs I would say would have been in the process industries and we go about this a couple of ways. We listen to our Regional Vice Presidents and what they're seeing in the marketplace and then we look at our top 100 accounts to get a sense of which areas are doing well, which ones are not and what I would tell you is, the general industrial companies on our lists, they're still challenged. That's been the case most of the year and I'm not sure that I saw or have heard any meaningful difference in the fourth quarter as it relates to general industrial firms. As it relates to the process industries, I would tell you that a lot of those including oil and gas looked better among our top 100 and then if you sort of listen to some of our RVPs talk about energy there definitely is more of an enthusiasm and some more encouraging facts on the ground in those regions that are heavier in oil and gas. So what I would tell you is, I don't feel like the fourth quarter felt a lot different in a lot of places than what we saw in the third quarter, but the notable exception would have been in those process industries and that oil and gas space. As you know, we were surprised by how impactful the decline in oil and gas was to us when it began to head south couple years ago. We would consider it a positive if in fact oil and gas had some legs and did better from here, but we'll see how that plays out.

Right, right. Maybe just for my second question just on the gross margin, nice sequential rise, you listed a number of reasons for the improvement, but one of them was not price and I was just wondering if you can comment on what's happening in the pricing environment and in particular given we've started to see some inflation and in fact, I think we've seen inflation for several quarters now, how do you feel about the ability to start getting price, especially if some of these end markets are still a little sluggish?

Sure. We've seen the same thing that you have with respect to commodity prices. I would tell you that those increases are relatively new. We've seen it happen before, only to sort of retrace if you will. So I think it's probably premature to be saying that we have clearly entered a re-flation period, if you will, but that said, we're watching it and we believe that if, if those raw material increases prove to be durable we believe that as we have in the past, we will be able to pass that through, through price increases. Yes, we don't have any reason at this point to think that that would not be a part of the equation. However, we have not at this point taken significant strides to begin that process yet.

Yes, I mean how much of a lag historically would there be, like several quarters or how do you think about...

Hey Rob, yes. I'm going to chime in so we can keep going through the roster - your questions, sorry.

Okay. Yes, of course, sorry. Thanks.

Our next question comes from Andrew Buscaglia with Credit Suisse.

Hey guys. Congrats on a good quarter.

Thank you.

Thank you.

Yes, can you and can you touch on, it sounds like, you didn’t have a ton of commentary, I guess in the press release or your prepared remarks just on trends improving. Can you comment maybe what you're seeing through January and just it sounds like December was a little bit muddled with timing and stuff like that, but just any recent update would be great?

I'm going to just interject one thing and then I'll shut up and let Holden talk. In regards to January we've learned over the years there are certain places you don't go because invariably what we talk about we're always wrong and the question is how wrong. So I'll stop Holden before he starts [indiscernible]. With that, I'll let Holden have his say.

Yes, I don't think there's a whole lot to add. We're not going to comment on January. I mean we put out the sequential rate of change that we're sort of looking at and beyond that, we're not going to go there, but I'll just reiterate again, fourth quarter was a lot richer on optimism than it was real progress. But you have to, we listen to the people in the field, we look at the same data that you guys tend to look at, and it's, it hopefully will translate into better results as we go through 2017. But I'll just leave it as in fourth quarter, general industrial companies were still fairly slow and if there was a favourable inflection it is in the process of the oil and gas industries and that's very early, so let’s see how that plays out and I don't think that I noted anything that inflected negatively.

Okay. Got it and then just switching on to the gross margins. Some of the things you had been experiencing with regards to customer negative customer mix, product mix, how are you feeling about gross margins in 2017 versus 2016 just relative to some of those sort of longer term headwinds we have been experiencing?

If you think of the growth drivers we've talked about for a number of years and again growth drivers are, I just want to caution, our sales plan at the local level is what drives our business. The growth drivers that we talk about serves as the means to the end of how you serve your customer. The impact of, we had, I believe we had a very successful year taking some first steps, steps that started one and two years ago of expanding our onsite presence, all those things continue a pattern that's been in place for 20 years and that is our mix of customers are continually changing. Our product mix continues to move a bit away from fasteners. Perhaps we can slow that down a little bit if there is some recovery that helps our fastener business in calendar 2017, but the underlying long term pattern is still what it is. And what we need to be smart about every day is identifying those pieces we can grab on to and make a little better – a decade ago a piece we grabbed onto was freight. In the last five to seven years a piece we've grabbed on to is our exclusive brands, our private labels and making sure we have a great strategy to support our supplier base and our product mix in serving our customers. And, but the underlying trends are still there. We just need to defend the position every day and I think we gained some footing on that as we went through 2016. It was still a tough year to go through 2015 and 2016 I should say, because the trend has been going on for several years.

Right, okay, alright. Thank you, guys.

Our next question comes from Hamzah Mazari with Macquarie.

Good morning. Thank you. Just had a big - I just had a big picture question around the store network. How should we be thinking about the store network longer term given the aggressive push on onsite? Does onsite cannibalize any other store revenues? Just any color on that piece. And then you talked about participation rate going up with district managers on onsite, but could you give some color on the sales cycle as well, does it take a year or six months, any color around the onsite business would be helpful?

Sure. Probably the best way to think about the big picture from a store network standpoint is, is over the last 20 years we've been quietly growing onsite in some of our Mid-Western business units. So last week I was in Southern Wisconsin, all of our general managers were in and in that discussion one of the things that stands out when I think of our business in Wisconsin and Illinois, over a third of our revenue in that business unit above 35% comes through the onsite type of strategy where we've been incredibly successful over time and developing our business in a broader fashion. But if I think of that business over the last 20 years we continued to open stores. We continued to grow our footprint and some of that, stem from the fact that we had things going on. We had non-fasteners growing in our business. So lot of markets that traditionally weren’t viable became viable. In more recent years we made improvements from the vending side of the equation, but we believe long term it's a huge market out there number one, and we espouse that often. We're not wed to one strategy, we're wed to getting close to our customer where it economically works in providing them a level of service that our competitors either can't or are unwilling to do and we believe it's a compliment of both. Only time will tell if structurally the fact patterns of our industry change and it prompts our ultimate store count to go up or go down, but the market is still there and we need to, of all to serve that market, but history has shown they're very complementary to each other onsite and store. In relation to onsite, it's typically a multi-year endeavour. Part of it is us getting, it's like anything it's incremental. So, we move, when we move in if you will, in the case for an onsite, it depends sometimes on the product lines we're starting with. It might move faster if we're moving in with an OEM relationship or a broad bending platform relationship. It might move a little slower if it's a broader mix of products and we're picking up particular commodities as we go along. I believe it's probably in many cases two to four year endeavour to get in deeper, maybe it's one to five, but it takes time and that's one of the points that we stressed earlier in the year as we want to build momentum back into our business and getting traction to the onsite is a big piece of that.

Hamzah, you also asked something about cannibalization and in fact we do generally speaking take some sales out of the store and that becomes the seed revenue for that onsite and what we find is that inside of 12 to 24 months that seed revenue has grown dramatically from its original number. As it relates to the store, our expectation generally is that that store, which now note doesn't have to provide a disproportionate service to a single customer can sort of have, it's sort of selling energy reinvigorated and then they can go out and from a bit of the lower base begin to grow that business again. And we've sort of all through the compensation with the onsite business to make it neutral from that standpoint, but the expectation is that the store, sort of no longer responsible for that piece of revenue will go on to find new active accounts and just begin to grow that business again from that new level.

One additional piece in when I think of the cannibalization that comment would have been true of store openings for the last 30 years as well and so onsite isn’t new piece of the equation. Really what we're doing and I think Holden described it best, we're taking some seed dollars where we have a great relationship and we're going after business that historically, our store network wound not go after because it wasn't geared to service that business given the profile of the gross margin in that business and we need to structurally change our cost components to go after that business.

That's very helpful color, I appreciate it. Just a followup and I'll turn it over. How much of your cost of goods sold is foreign sourcing? A competitor of yours mentioned, there is just 15%, just trying to get a sense of what you guys are on at? Thank you.

So what we have said is that we think that 40% to 45% of our COGS are probably derived from overseas. I don't know what the competitor, how he is defining the number. I will tell you that of that 40% to 45% not all of that is directly sourced, obviously have a significant operation with passcode that directly sources product, but that does not rise to near the level of 40% to 45%. So the number that we use includes not only the directly sourced, but also that product that we may buy domestically, but ultimately is sourced from an overseas customer. But we talk about it in terms of 40% to 45% of our COGS and that's, that's kind of how we've discussed it.

Got it. It makes sense. Thank you.

I'll add on one piece there as well. The fastener production moved offshore of North America. So, Fastener on in 2017 we're celebrating our 50th year in business largely the trends within fasteners were moving offshore well became we even became a company and a lot of that was driven by the automotive sector back in the late '50s and early '60s. So our percentage is a little bit higher because of the Fastener concentration in our business. With that said, our concentration won’t be any different than any of our peers in the industry given some of the product mix. And so I see us as being in a similar boat if you will, with everybody else with a lower cost structure in our underlying business.

Got it. Thank you.

Our next question comes from Ryan Merkel with William Blair.

Hey thanks. Good morning guys.

Good morning.

Good morning.

So first Holden, you said with a little faster growth you could leverage the income statement in 2017. So two questions, what level of sales growth do you think they need to see SG&A leverage and then secondly is SG&A growing half the rate of sales a reasonable goal in 2017?

So I don't think that our original guidance was changed. I think we said that at sort of low to mid-type of revenue growth that we will look to sustain the margin and if we can get mid to high-type of growth we can expand it. I still think that that is, generally speaking, where we see the model. In terms of the rate of growth of SG&A, bear in mind that if we do in fact get better growth then we would expect to see our incentive comp go up. We're going to continue to invest in vending. And so, we have talked about achieving 20% to 25% type incremental in sort of a low to mid-type single-digit growth environment and maybe 25% to 30% type incrementals, if you get to mid to high sort of where we were I think in the third quarter and we haven't seen anything that sort of changes that.

Perfect . Got it, okay. And then second back to the onsites how are the installations you've done working and how much did onsite add to growth in 2016, if you have that number handy, because I think you were hoping for maybe 300, 400 basis points to grow from onsite this year?

The onsites grew as a category about 25% for the year.

That's including the transferred, came like dollars.

Correct. Yes, that’s the challenge. Right, so we’re up 120.

Let me, Ryan why don’t we talk about the specific numbers offline. We have them, but I'm not going to do the math on this forum. So when we touch base on it offline.

No worries. But just you've sign up a lot of onsites, are they working as you expected out of stores starting to add new active accounts with the freed up selling energy.

Yes, I'll answer that from the standpoint, we took a deep dive look at the onsites that had been turned on and had sufficient history and for us sufficient history meant they had to be operating at least nine months. And so we looked at that to see what’s happening in that group and we liked what we saw and we weren't surprised by what we saw. We saw a group of accounts and the numbers that we really analyzed it was just over 50 of our onsites that have been operating long after we could really get a feel for it. And the trends were solid and it wasn't driven by a few that were pulling it up or pulling it down and which is good to see. It was a good performance generally speaking across the group. We saw that the gross margin of the store that’s spawned, I don’t know if that's the right word, but that on the onsite business their gross margin went up post separating the business, which is what we would expect because typically you're taking a larger customer you might be at 10 to 20, $30,000 month customer and you’re extracting it from $100 to $120, $150 store and the remaining business actually have slightly higher gross margin. So we saw that as we expected, we saw that business with , with a little bit with a lower gross margin than our average onsite, but that is very typical, because often times when you are stepping into a new onsite you are stepping into products that you might be not sourcing half mil yet. You might not truly understand some of the products from the standpoint of I think is back to that optimal sourcing component. You might have product where you know the optimal source, but you're going to get the product in for three, four, five, six months, and so you have some lower margin sales that are going out. You might have some product that the customer had a meaningful supply on and you don’t pick up that business for a period of time. But when I look at those onsites that we've studied again we were pleased with the results and we're surprised by the results. I suspect when Holden runs his numbers he is going to find a low single digit probably of one to two kind of number given the fact that so, much of our business was ramping up in the latter half of the year, but I'll hand it back to Holden.

Yes, so the incremental revenues through onsite would have increased our revenue, probably a little bit over 3% for the year, do you remember that does include some cannibalization. That would take that down a little bit, that's a total number, but the onsite revenue did in fact contribute a little more than 3% of our growth.

I would suspect it would probably cut it by a third to half.

Yes, okay. Okay. That's very helpful. Thank you.

Our next question comes from Robert McCarthy with Stifel.

Good morning, everybody.

Hi Rob.

Just following up on a couple issues, I suppose first, just maybe Holden you could talk about the process industries and oil and gas and maybe give us some sense of what you think the exposure is, just maybe walk us through the number of stores in the right regions, give us a sense beyond kind of the SIC codes of how big the overall exposure could be to your network for sales?

Yes. So the direct impact is fairly light; I think we've talked about sort of low, mid-single digit direct impact from the oil and gas industry. So you're right to say that the impact is really more indirect. I'm not sure that we've really sort of come down exactly on a sort of a number we think it is. It clearly does matter and Dan can give more historical perspective, in terms of what the full-year impact is. But bear in mind that where that full year impact comes from companies like Flowserve or Wear Group that are not oil and gas companies, if you will. They are pump companies or engineering companies, but they have significant exposure to the oil and gas within their overall customer mix, that's where our exposure comes from. So there is a challenge in figuring out the full exposure comes from that fact. Dan, do you know kind of what our little full year indirect impact might be?

I don't, in the past I think we've talked about a number somewhere between 10% and 12%, but we, it's really difficult to pinpoint it because there is so much indirect impact. The example I’ve often cited is, if I travel an hour and a half to visit my mom, there is a sand mine up, two sand mines within two miles of the pharma Groupon. One was they both were operating, two years ago, one was operating 24 hours a day, the other one was operating 16 hours a day. One of the shut down and the other one has one shift. Our Red Wing store was impacted by oil and gas, but I went to sort of our Red Wing, Minnesota stores having an impact of oil and gas. So it's very hard to list it out.

Okay and Holden perhaps we'll table that for a little probing offline. The second major question for this call is maybe you just talk about onsite. I mean, obviously people have been talking about the opportunities there in terms of what's going on, but maybe just talk about really how important is from an optimization of network potential? I mean, I think you cited in the past at least anecdotally, how high the margin is in your legacy stores and kind of your book [ph] Gaiden, which is the upper peninsula of the Midwest and Minnesota in terms of where the margins are and could you just talk about, really what you think the margin opportunity long term could be for the company at least qualitatively given onsite?

Well, I’ll throw out a few pieces, and then we'll wrap the call, so running up against 45 minutes. For us profitability on the day really stems from where is our average store size in that region and how well are we doing managing the growth of our business over time. So if I look at the Midwest where we have a greater concentration of onsite. It is also an area or the country where we have the largest average store site because it has grown over time. Our West Coast started opening up 20 years. Our Midwest started opening up 50 years ago. So we have a 20 to 30 year head start. And our highest operating margin business is in the Midwest. With that said, one thing Bob Kierlin has always reminded us and in the 20 years that I've been here and probably in the50 years if he has been here is that at the end of the day gross margin marker we look at to understand our business. Operating margin is a marker we look at to understand our business, but great organizations long-term focus on where they can provide their shareholders with their employees with an opportunity, their customer with the service and their shareholders with a return on investment. And we like the various businesses within Fastenal, because they all provide a very attractive return and that is at the end of the day the ultimate test of a business. And if you're providing opportunities to employees, you have a great organization to serve your customer long term; we believe we have all those components in our store network and in onsite. With that, I see we're at 45 minutes and similar prior quarters, we realized we're in the thick of earning season and everybody has a pretty busy plate. We’ll sign off for now again. Thank you for your support of Fastenal and thank you for welcoming Holden to the team.

Thank you.

Ladies and gentlemen that concludes today’s presentation. You may now disconnect and have a wonderful day.